Week 7: Substantive Testing I (TOD, audit evidence, audit sampling) Substantive procedures are audit procedures designed to detect material misstatements at the assertion level. Substantive procedures involve comparison between underlying accounting data to external evidence (corroborating information). There are two types of substantive procedures: 1. Substantive test of details - substantive tests of account balances, transactions and disclosure to obtain audit evidence to detect material misstatements at the assertion level Test of balances Tests that substantiate account balances at period end - ACCERP Test of transactions To inspect underlying documents, to trace the flow of transactions through the accounting system and to recalculate for clerical accuracy. · VOUCH - from G/L to source documents (occurrence) · TRACE - from source documents to G/L (completeness) 2. Substantive analytical procedures - undertaking analytical procedures to determine the amount of misstatement in an account balance Sufficient appropriate audit evidence Auditors should select audit procedures to provide sufficient (quantity) appropriate (quality - relevant and reliable) audit evidence for the auditor to provide a reasonable basis for forming an audit opinion. Test of details Select samples -> test samples -> note error -> based on errors, make an estimate of overall error Types of substantive test of details: Procedure Inspection Examination of records, documents or tangible assets. Observation Observation of the behaviour of operating personnel and the functioning of the business in operation External confirmation A type of enquiry by which an auditor obtains direct written statements from a third party. Confirms existence. Re- calculation Involves checking the mathematical accuracy of documents or records and may be performed manually or electronically. Re performance Enquiry Explanation The auditor may independently execute procedures or controls that were originally performed as part of the entity's internal control Interviewing and/or obtaining written statements from management and employees Examples · Inspection of tangible assets provide audit evidence concerning their existence . External source documents (e.g. bank statements or title deed) to confirm rights and obligations/existence · Gathering evidence of control activities being carried out · Trade debtors confirmation . Trade creditors confirmation . Bank confirmations · Solicitors representation letter · Reasonableness calculations (e.g. payroll tax) · Leave entitlements · Depreciation/amortisation expenses · Impairment calculation · Enquiries of those charged with governance · Management · Accounts employees
TEST OF TRANSACTIONS Example: Sales transactions Assertion Accuracy Sales transaction (sales journal) -> sales invoices -> verify price to schedule of fees > verify quantity to shipping documentation Cut-off Take sample of sales transactions, from the sales journal, both during the current period and the next period, and compare the date in the journal to the date on the relevant document (such as a sales invoice or dispatch docket) Completeness Test from supporting document (invoice, delivery note) to sales journal Classification Take a sample of sales transactions and examine the sales invoice to check that it is an actual sale and not some other type of transaction, such as an asset disposal. Occurrence Vouch entries in sales journal to supporting documentation of sale (i.e.